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Wealth, Inequality & the Great Recession - Did we Learn our History Lesson?

Nov 07, 2011 | By George Vlasits

“In the long run,” as Theodore Roosevelt told his fellow Americans back in 1912, “this country will not be a good place for any of us to live unless it is a reasonably good place for all of us to live in.”

“There is nobody in this country who got rich on his own. Nobody. You built a factory out there – good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for.” Elizabeth Warren

The Occupy Wall Street movement has brought media attention to the underlying cause of the current economic crisis: the increasing inequity in the distribution of wealth in the US.

Until recently, many mainstream economists and almost all media coverage had focused on the machinations of the banks and brokerage houses and on government debt as defining a “financial” crisis, which began in 2007. Accordingly, once the banks were bailed out and governments cut back on spending, corporate profits and the stock market would rebound, businesses would start investing and creating new jobs and the country could lift itself out of the Great Recession.

Clearly that didn’t happen. Why not? The answer lies in the growing inequality which has characterized the US over the past 30-40 years and the new “growth model” which has led to this accumulation of wealth at the top (the 1%) and debt at the bottom (the 99%). That these conditions have made it impossible to achieve real growth and prosperity for the large majority of Americans should surprise no one. History provides us with a case study in what can happen as a result of this maldistribution of wealth

Before examining the historical antecedents, it should be noted that the U.S. is not simply in a financial crisis, but in a much broader economic crisis. The finance sector has in some sense recovered since 2008; banks have been stabilized (at least in the short run); and corporate profits in many cases are at record levels. Today, large corporations are sitting on trillions of dollars, but official unemployment remains over 9% and the economy has definitely not recovered for the 99%. The housing sector remains in the doldrums and some economists now forecast a double dip recession. Others doubt that the last 2 years have represented a recovery at all.

Looking at Economic History

In attempting to sort out the reasons for this continuing economic crisis, we need to look at economic history of the 1920s and development in the US economy over the past 30 years. The Great Depression was not simply a result of the stock market crash of 1929. It was a product of a lack of demand for goods and services, a crisis of undercomsumption. This lack of demand was itself a product of vast gap in wealth between the rich and the rest of the population, but was masked for most of the 1920s by the growth of consumer debt. The buy now, pay later ethos of the Roaring Twenties resulted in the bubble economy of the 1920s. Eventually the accumulation of debt made servicing the debt a drag on consumer demand and the bubble was burst.

What we have today is a return of the very economic conditions that led to the Great Depression. Since the late 1970s the US has seen a massive transfer of wealth from the bottom 80% of the population to the top 1%, resulting in economic inequality not seen in this country since the 1920s. The Gini Index, considered one of the best measures of income inequality, has risen from a low point during the prosperity of the 1940s, 50s and 60s to match the levels of the late 1920s over the past few years. The situation is even more extreme if we look at the very wealthiest Americans. Since 1982 the wealth of the Forbes 400, adjusted for inflation, has increased 612%, while at the same time the wealth of the bottom 60% of American families has actually DECLINED!

Erosion of the Social Contract

In the process, the Social Contract of the post WW II era, which included higher wages, income and job security, and a generally improving standard of living and which provided opportunity for social mobility and thus the growth of the middle class (although clearly not for all), has been seriously eroded. As early as 1990, a former chief political analyst for the Nixon campaign, Kevin Phillips, documented the increasing economic inequality and analyzed how the federal government was, in part, responsible for this transfer of wealth in his book “Politics of Rich and Poor”. Other factors included the enormous growth of the financial sector of the American economy and globalization. Since 1990 the inequality has only worsened, spurred on in the last decade by the Bush tax cuts.

At the same time there has been a massive increase in debt. In 1987 private and public debt in the US totaled $10.5 trillion; by 2008 this had increased to $48 trillion (of which less that 25% was owed by the federal, state and local governments.) What is more alarming is that by 2006 debt had reached 335% of the Gross Domestic Product, far higher than the previous peak of 287% in 1933.

The growth of debt is largely responsible for the periods of faux prosperity in the past thirty years, periods which have been interrupted by frequent financial and/or currency crises in the US and around the world (in some cases resulting in recessions, e.g. 1990-92, 2001-02, and 2007-? in the US). During this period consumer demand was sustained by borrowing, much of it against homeowners’ equity. The housing bubble, stimulated by the now famous subprime mortgages and other nefarious lending practices based on the assumption that home prices would never come down, helped keep consumer demand high by allowing millions to use their homes as ATMs. Harvard economist Martin Feldstein calculated that in 2004 borrowing against equity alone accounted for 7% of total disposable personal income, without which consumer demand would have been insufficient to support economic growth.

The growth of income inequality and debt followed by the collapse real estate values and the rise mortgage foreclosures in the 1920s and 1930s parallel what has happened in the last three decades. Of course, not everything is the same (and some of the important differences need further examination). A basic sense of justice argues that extreme inequality is wrong. A look at its effect on the economy makes the point that it ultimately has negative consequences for everyone, rich or poor. But unless we learn from history we are, as the saying goes, doomed to repeat it.

George Vlasits is a resident of Maryland who taught Advanced Placement U.S. History for 18 years and has done extensive reading in economics and political economy.

Comments

The economic inequality created by our politicians over the last 40 years will not receive the fixes it requires until the politician’s campaigns stop receiving money from special interest such as Wall Street, pharmaceutical companies, big oil, big agriculture and unions and many, many others. Special interest money has corrupted our democracy.

This is an excellent piece. For anyone who is interested and would like to read more, I'd like to suggest two books, Hard Times by Studs Terkel and The Big Squeeze: Tough Times for the American Worker by Steven Greenhouse. It amazes me how much we DON'T learn from history - and how often we miss reading the signs that are right in front of our faces. Both of the books will show us what we could have learned from both the long-ago and recent past. We will continue to repeat the same mistakes if we don't wake up.